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Pound sterling higher as rate hike expectations offset Brexit fears

British pound daily update


British pound daily update

The British pound is mostly higher today, and is currently rising against the euro, the Australian dollar and the yen. Note that pound sterling is falling against the US dollar. While economic data and Brexit-related tensions are weighing on the currency, the pound is receiving some much-needed support from rate hike expectations. Looking at economic data, both the second release of UK Q4 GDP and year-over-year business investment missed consensus estimates yesterday. Recent economic data from both the UK and the Eurozone has been particularly disappointing, although the outlook for future growth remains positive.

In political news, Theresa May has ended a country retreat with most of her senior colleagues designed to win support for her "three baskets" approach to a future relationship with the EU. Under the plan, three key sectors would approach the EU using a different strategy. In some areas (such as auto manufacturing), rules will be closely aligned to existing EU rules. In other areas, the UK is looking to develop its own regulations. The FT and the BBC are reporting that the talks were fruitful, with both anti and pro-Brexit Conservatives mostly happy with May's approach. Unfortunately, the European Commission has rejected Theresa May's "three baskets" approach to a future relationship with the EU in a set of published presentation slides. Specifically, the Commission stated that "if UK aspires to cherry pick [there will be a] risk for integrity and distortions to proper functioning of internal market". May is seeking to end the European Court of Justice's jurisdiction over the UK, while retaining a high degree of access to the single market. Our short-term outlook on the pound is neutral, while our medium-term outlook is bullish. 

GBP/USD is currently above 1.3930. EUR/GBP is down, with the exchange rate above 0.8820. The pound is up against the Australian dollar and flat against the Canadian dollar. GBP/AUD is currently above 1.7820, while GBP/CAD is above 1.7720.

Looking at UK economic data this week, we’ll get UK employment data as well as UK inflation report hearings. UK 3-month wage growth (2.5% vs. 2.4% expected) beat expectations but employment (88k vs. 173k expected) fell below estimates. Bank of England Governor Mark Carney provided an upbeat forecast during inflation report hearings. Q4 GDP (1.4% vs. 1.5% expected) and YoY business investment (2.1% vs. 2.4% expected) both missed estimates. Last week, the consumer price index was slightly ahead of expectations.


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